Using your RRSP to buy investment property: Should you do it?
While using your RRSP to buy an investment property might seem like a great idea, there are many things to consider before cashing out. Keep reading to learn more about why this may not be such a smart move and how Alpine Credits can help you secure better financing.
The basics of using your RRSP to buy an investment property
Unfortunately, you can’t hold real estate within a registered retirement savings plan (RRSP). The Canadian government designed this account for assets such as cash, GICs, and stocks (known as “qualified investments”).
Using your RRSP to buy investment property would mean selling these assets and withdrawing the cash. As we mentioned in this article, the government doesn’t stop you from doing just that, even well before you reach retirement age.
You simply have to pay taxes on the amount you withdraw, which would be the case even in retirement.
There are other financial consequences of cashing your RRSP out to purchase an investment property, which we’ll explore shortly.
What about the home buyers’ plan?
The Home Buyers’ Plan is a federal program designed to help Canadians buy their first residence. It allows qualifying home buyers to withdraw funds from their RRSPs tax-free as long as they replenish it within 15 years.
Unfortunately, you can’t use this program to purchase an investment property. The Home Buyers’ Plan is meant specifically for purchasing your first primary residence.
Using your LIRA for a down payment on a house
A locked-in retirement account, as its name suggests, is fairly restrictive. You’re not allowed to remove money from this account except in extreme circumstances. Purchasing an investment property would not qualify.
Why using your RRSP for a down payment on an investment property may not be a good idea
The problem with cashing funds out of your RRSP to purchase an investment property is that the associated taxes and opportunity costs expose you to significant financial risks.
RRSP withdrawals are taxed as ordinary income. If you have income from another source (i.e. your job), your withdrawal may push you into a much higher tax bracket. In other words, it may not leave you with as large a down payment as you might expect.
The opportunity cost involved with pulling money out of your RRSP early can be even greater. As the stock market continues to reach record highs, withdrawing your funds prematurely robs you of future growth opportunities.
Of course, the right real estate investment can offset some of these losses. However, keep in mind that investment property income is taxed as well. Selling your investment property also incurs substantial taxes, which wouldn’t be the case with your primary residence.
Additionally, pulling money out of the stock market and piling it into a single asset such as a house can threaten your portfolio’s asset allocation and risk profile.
Thankfully, there are other ways to invest in real estate without exposing yourself to these downsides. Let’s take a look at that now.
Alternatives to using your RRSP to buy an investment property
Real estate investment trusts (REITs) behave much like stocks, allowing you to invest in residential and commercial properties without the need for a substantial investment. You can hold REITs from directly within your RRSP as well, benefitting from years of tax-free growth and dividends.
The accessible nature of REITs has made them tremendously popular among people who want to invest in real estate without pulling money out of their retirement accounts.
Using your home equity
Let’s be real. While REITs are great, they don’t offer the tangible benefits of owning an investment property. You can’t collect rent or make improvements that have a direct impact on your investment’s value.
Thankfully, you can unlock these and all other benefits of owning an investment property by tapping into your existing home’s equity and using those funds for a down payment. You can even buy an investment property outright if you have enough equity in your home!
Home equity loans are incredibly simple. At Alpine Credits, we take your home’s value and subtract the amount remaining on your mortgage. The resulting number represents the equity you have built up in your home. Whether this amount is $10,000 or $500,000, we can lend you those funds for just about anything you want, including to purchase an investment property.
Click here to learn more about how our home equity loans work for property investors.
Benefits of using a home equity loan to buy an investment property
Here’s a quick rundown on the benefits of using a home equity loan to buy an investment property.
Easy application and approval process
You can receive a decision on your home equity loan application within 24 hours. At Alpine Credits, we also don’t grill you on your income and credit score or get involved in your investment property purchasing decision. We trust you to make wise investment decisions for yourself and will happily give you a loan, even if you don’t have any income. As long as you have available equity in your home, we’ve got you covered!
Conversely, traditional banks are increasingly cautious about issuing conventional mortgages to real estate investors. You’ll need to prove that you’re capable of maintaining the preferred debt-to-income ratio of 36% or less while paying your mortgage and that of the investment property.
Crucially, many banks exclude your property’s investment income (i.e. rent) from this calculation. In other words, you’ll need to have traditional employment income capable of paying both mortgages without pushing your debt-to-income ratio above 36%. This is an extremely high barrier to entry. Home equity loans include no such limitation.
Low interest rates
After getting turned down at traditional banks, many hopeful real estate investors turn to private mortgage lenders. While it’s much easier to get approval from these lenders, they also charge exorbitant interest rates.
At Alpine Credits, our rates are very competitive and reflect our commitment to helping Canadians tap into their home equity easily and affordably. Compare our interest rates to those of other lenders here.
If you change plans after getting approved for a home equity loan from Alpine Credits, no worries! The money is yours to use as needed, even if that involves buying a different property than you initially intended or scrapping the idea altogether in favor of renovating your existing home.
Banks, meanwhile, have much tighter rules about what you’re allowed to do with the loan. This means substantially less flexibility than you’d get with a home equity loan.
No down payment requirements
If you have substantial equity in your home, you may be able to purchase an investment property without the need for a down payment. This would never be allowed at traditional banks, which typically require down payments as high as 20% of the purchase price.
Frequently asked questions
A locked-in retirement account (LIRA) typically does not allow you to withdraw funds prematurely to purchase a home. Once the account reaches maturity, however, you’re free to use the money as you please. If you’d like to purchase a home prior to that, you’ll need to secure some other form of funding, such as a home equity loan.
If the cottage will be your primary residence, you can take advantage of the Home Buyers’ Plan to pull money out of your RRSP tax-free. You’ll just need to repay that loan within 15 years. If the cottage is a second home or an investment property, however, you would not qualify for the Home Buyers’ Plan.
While there’s nothing stopping you from using your RRSP for a down payment on an investment property (or even to cover the full purchase price), this is typically inadvisable. We hope this article has offered valuable insights into why that is.
If you’d like to apply for a home equity loan in order to purchase an investment property, click here. We look forward to serving you!
At Alpine Credits, Homeowners Get Approved.